ETF Focus

Breaking the EFT Lock-Step

With the market dropping, products as diverse as exchange-traded funds in emerging markets and U.S. stocks are moving in tandem. An investor could break away by using blue-chip stock funds or gold ETFs.

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With few exceptions, the recent market volatility has been pushing exchange-traded funds into lock-step more than at any time since the depths of the financial crisis -- giving investors fewer ways to spread risk and limit losses. "There's effectively no difference now between investing in ETFs focusing on emerging markets, U.S. stocks or even junk bonds," says Nicholas Colas, chief market strategist at ConvergEx Group.

Stocks tend to move in tighter proximity when markets are dropping, observes Robert Bowman, portfolio manager at Edelman Financial Services in Fairfax, Va. "That's when everyone starts throwing out the baby with the bathwater."

The current rise in correlation looks much like that of the post-Lehman period in 2008 and spring 2010, when economic-growth concerns spurred the Federal Reserve's second round of quantitative easing.

Managers at Luminous Capital are preparing for a sixth week of tighter conditions. "We're seeing some signs of easing, but we believe that investors will continue to see intermittent periods of heightened correlations, until macro issues hanging over markets come to some sort of resolution," says Alan Zafran, partner and co-founder of the Menlo Park, Calif.-based advisory firm.

Blue-chip stock funds focused on corporate-dividend streams are one way to differentiate, says Sam Katzman, chief investment officer at Constellation Wealth Advisors. The firm also is maintaining its positions in gold via the GLD ETF.

In periods of high correlation, heightened volatility and low rates, top managers seem to agree that it's better to own large-cap stocks that have global reach and a record of paying healthy dividends.